The shutdown of the Houston Shipping Channel played a big part in yesterday’s 7.2 million-barrel oil supply increase, reports Phil Flynn, who will be speaking at the Las Vegas MoneyShow May 13-15.
The Energy Information Administration (EIA) reported that Houston did indeed have a problem. It was clear that the shutdown of the Houston Shipping Channel played a big part in yesterday’s big-time 7.2 million-barrel oil supply increase. In fact, the crude oil supply increase in the Gulf Coast came in at a whopping 8.732 million barrels, which means that more than likely if the channel was open, we might have seen a draw. U.S. crude exports have also fallen due to the closure, reaching just 2.72 million barrels per day last week after record highs of 3.6 million last month.
Of course, weak refining runs did not help either. We saw a slew of refining issues that led to lower than expected refining runs. The EIA reported that U.S. crude oil refinery inputs averaged just 15.8 million barrels per day during the week, 18,000 barrels per day more than the previous week. That put refinery runs at 86.4% of their operable capacity last week. That number had better improve or we will continue to see rising gas prices at the pump.
The EIA reported that even motor gasoline inventories fell by 1.8 million barrels last week and are now only 2% above the five-year average. That came as production went up. Distillate fuel inventories also fell by 2.0 million barrels last week and are about 6% below the five-year average; a concern as farmers start making their way to the fields.
So, while we may see a correction in the price of oil, you can’t ignore the underlying bullish fundamentals. The EIA reported that U.S. crude oil imports averaged 6.8 million barrels per day last week, and while they were up by 223,000 barrels per day from the previous week, over the past four weeks, crude oil imports averaged about 6.7 million barrels-per-day, 12.1% less than the same four-week period last year. It’s a huge number and shows quite clearly that OPEC cuts and sanctions on Venezuela and Iran are taking their toll.
Hedgers who took advantage of the sharp break and heeded our call to use the break to hedge, did well as gasoline has rallied 47%, while heating oil has risen 19%.
Oil bears did point to an uptick in U.S. oil production as that hit a record 12.2 million barrels a day as a bearish sign. Yet, because of monthly downgrades by the EIA and the fact that many shale producers are bleeding cash we may see that number get revised downward again. Too many firms are still losing money on every barrel.
Reuters reports “U.S. shale producers last year again spent more money than they collected, extending a years-long streak of putting oil output above cash flow and investor returns, according to a Reuters analysis of top independent producers. All but seven of 29 of these producers last year spent more on drilling and shareholder payouts than they generated through operations, according to securities filings. Total overspending by the group was $6.69 billion in 2018, according to Morningstar data provided to Reuters by the Sightline Institute and the Institute for Energy Economics and Financial Analysis.”
Shale firms are pushing U.S. oil output to record-shattering levels, but companies have prioritized spending on acreage and drilling. The data showed few producers generated solid returns, even as U.S. crude prices rose 28% in 2018 to an average $65.06 a barrel, from $50.79 in 2017.
Nick Cunningham at Oil Price writes that “This is a cycle in our industry where only the large well-capitalized companies can grow. Small companies without access to capital are stagnant,” one oil executive in Texas said in response to a survey from the Dallas Federal Reserve. “It is a major industry readjustment period.”
The oil majors are scaling up their operations in the Permian basin, with ambitious plans to ratchet up output. ExxonMobil plans on hitting 1 million barrels-per-day by 2024 from the Permian, and Chevron hopes to reach 900,000 bpd. U.S. shale is more important than ever to their business plans.
Nick Cunningham of Oil Price writes that “the role of shale is critical to the majors, small- and medium-sized E&Ps are struggling. Poor financial returns, loss of interest from investors, pressure to cut spending and return cash to shareholders, and encroachment from the majors are tightening the screws on smaller drillers. The “shrinkage in market capitalization of some companies is breathtaking. These loses translate into a loss of interest in further direct investments in the drilling of new oil and/or natural gas prospects,” another respondent said in the Dallas Fed survey.
A few other concerns seemed to dominate the thinking of Texas oil executives: “Qualified young professionals are avoiding joining the oil and gas industry. Pipeline constraints in the Permian Basin continue to cost us up to $20 per barrel and have a significant impact on capital expenditures. This cost changes month by month, making revenue estimation difficult. Smaller independents are competing with a different animal that is too expensive to tame. Deep pockets for manufacturing oil and gas have taken over the patch here.”
These concerns suggest that the shale industry is in a deep state of flux, with the majors edging out their smaller competitors. That could impact production, although it is still unclear how this will shake out. The EIA reported a decline in output in January, which suggests drillers came under pressure at the end of 2018 when oil prices collapsed.
Other sources of price support come from the prospects of a U.S.-China deal and signs that China’s oil demand will again break all-time records. Talk of zero exports from Iran and the belief that Venezuela stabilization of output will be short lived. Still traders that are now fat with profits may want to lighten up but be prepared to reposition on any hard break.
Natural gas may be the feature today. Dow Jones says that the EIA is expected to report gas storage levels rose by 7 billion cubic feet during the week ended March 29, according to the average forecast of 10 analysts, brokers and traders surveyed by The Wall Street Journal.
You may have missed Celine and Elton John in Las Vegas but you can still see me at the Las Vegas MoneyShow in May.
